Indonesia has become a favorite of international investors in recent years. As evidence of this, portfolio and foreign direct investment flows have been on the rise and the economy continues to receive upgrades by major rating agencies, placing it only one notch away from coveted investment grade status.
The favorable attention Indonesia is attracting owes to the economy’s strong medium-term growth prospects and its resilience to external shocks. These positives, in turn, are due to a combination of structural factors that have helped insulate the economy from recent global downturns, implementation of sound macroeconomic policies, and fostering of a stable political environment. Keys to investor optimism include ongoing efforts to upgrade and deepen Indonesia’s lagging infrastructure, policies to reduce corruption and promote good governance, and steps to strengthen institutions.
Progress is being made in all of these areas, though much remains to be done to unlock Indonesia’s vast growth potential over the medium term. Indonesia’s strong prospects are representative of a sea change that has taken place during the past two decades in investor perceptions toward emerging markets more generally. Indeed, negative and static adjectives such as “under-developed” that were once commonly used for these countries have been replaced with “emerging” to describe the dynamic nature of their economies, where higher growth is bringing rapid convergence to the income per capita of rich countries. Given the large populations of emerging markets including Indonesia—the world’s fourth most populous country and largest in Southeast Asia—the emergence of such economies should bring huge business opportunities for investors serving those markets. One of the key factors for this longterm trend in favor of emerging markets is better population dynamics than in the developed world, and higher investment in physical capital driven by urbanization and industrialization.
In addition, although investment in human capital is lower than in the developed world on average, the difference is narrowing rapidly; the same is true for expenditure on research and development and the quality of the institutions.
These three factors, which had long explained the edge that the developed world maintained against the rest, will also be supporting the convergence of the emerging world. In the remainder of this paper, we present a study undertaken by BBVA Research on a set of EAGLE economies — Emerging and Growth-Leading Economies — to demonstrate the potential of our favorite emerging markets. This research points to an important structural change in the global economy in which a handful of emerging markets will lead growth in the world economy. Indonesia’s “Garuda economy” is one of the EAGLEs and, indeed, it has earned a place high on the list.
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